Second Mortgages – Risks and Rewards for Calgarians

In Canadian real estate, a property can have multiple home loans or caveats against it. The mortgage loan which is registered on the title or deed first is called the first mortgage or is often referred to as first position. The caveat registered second—after the first—is called the second mortgage. A property may have a third or fourth mortgage, but those are rare.

Second mortgages are slightly higher risk to a mortgage lender because, if the loan goes into default and the property goes into foreclosure, the first mortgage gets paid off before the second mortgage. What does risk mean to you? If you guessed a higher interest rate than first mortgages, you are correct.

Why Consider a Refinance / Second Mortgage?

There are three main reasons that our clients typically request a refinance / second mortgage loan.

• The first is to unlock equity through a home equity line of credit (HELOC) for debt consolidation, investment, renovations, or a contingency fund for emergencies. HELOC’s, although a second charge on the land title, are not truly second mortgages, but are treated essentially the same on your land title or deed.
• The second most common use of second mortgages occurs when high interest credit card debt, with often up to 19% interest, is consolidated into a lower interest second mortgage. With responsible management of old credit and the new, lower interest second mortgage, debt can be paid down quicker, and cost less in the long term. Still confused? Let us show you how.
• The third common reason our clients typically take out a second mortgage is when they wish to unlock home equity, but the mortgage interest rate or terms on their first mortgage are very desirable. In this case, the higher interest on a second mortgage for a smaller amount of home loan, when combined with lower interest rates on the first mortgage loan, leads to an overall lower blended interest rate than a new first mortgage. Let us explain...

Home Equity Loan Example

Assume you had a mortgage for $160,000 at 5% interest for 30 years. The payment would be $858.91. If you wanted to access $40,000 for renovations, there are two ways to do this:

• One is to refinance your mortgage to $200,000 at the rate of the day—let’s assume 6.25%. Your payment would be $1,230.
• The second way to unlock $40,000 is to keep the favourable rate on the first mortgage (5.0%) and take a second mortgage for $40,000 at, say, 9.25% over 25 years. Total payments for both are $1200 and your blended rate is 5.85%.

In this case, it makes more sense from a cash flow and rate perspective to keep the original, and add a second mortgage. Still confused? It’s time to give us a call, or refer to our mortgage calculator.

Enlist the Experts at MBN Financial when Considering Second Mortgages

Second mortgages can be a powerful financial tool when applied properly. Similar to first mortgages, second mortgages are available in a range of sizes, with options for interest-only second mortgages, insured or conventional mortgage loans, and a range of second mortgage terms and amortizations.

We will work with you to fully assess your particular mortgage needs, and come up with a mortgage solution that fits.